Austerity, democracy, and economics

Here’s Amartya Sen, from an interview with Olaf Storbeck and Dorit Heß.

Question: Professor Sen, do you have the impression that economists and economic policy makers are learning the right lessons from the most severe economic and financial crisis since the Great Depression?

Answer: I don’t think that at all. I’m quite disappointed by the nature of economic thinking as well as social thinking that connects economics with politics.

What’s going wrong?

Several features of policy making are worrying, particularly in Europe. The first is a democratic failure. An economic policy has to be ultimately something that people understand, appreciate and support. That’s what democracy is all about. The old idea of “no taxation without representation” is not there in Europe at the moment.

In which respect?

If you are living in a southern country, in Greece, and Portugal and Spain, the electorates views are much less important than the views of the bankers, the rating agencies and the financial institutions. One result of European monetary integration, without a political integration, is that the population of many of these countries has no voice. Economics is de-linked from the political base. That I think is a mistake and it goes completely against the big European movement that began in the 40s and fostered the idea of a democratic, united Europe. . .

You make a lot of references to old economic thinkers like Smith, Keynes and so on. However, if you look at the current economic research that is published in the journals and taught at universities, the history of economic thought does not play a big role anymore…

Yes, absolutely. The history of economic thought has been woefully neglected by the profession in the last decades. This has been one of the major mistakes of the profession. One of the earliest reminders that we are going in the wrong direction has come from Kenneth Arrow about 30 years ago when he said: These days, I get surprised when I find the students don’t seem to know any economics that was written 25 or 30 years ago.

Sen makes a good point about the lack of democracy in the EU. Without political union this will not be remedied.Political union in such a diverse continent is unlikely and probably undesirable anyway.
It is obvious that the EMU is unworkable without political union.So the whole rotten edifice should be consigned to history and a way found to sort out national disputes without recourse to the military as in the past.

The problem has been in the united States not in Europe. The Ameficans started this mess when they let the gap between the rich and the poor widen so dramatically after 1980. This meant that the Amefican elites had abandoned the idea of America being a people of plenty. No democracy can flourish unless that is its core idea. In Europe the relentless takeover of the financial systems spreading out from Anglo-Saxonia has brought about the crisis in Southern Europe and the North-South divide. The answer is a democratic takeover of the strong economies and the rejection of tthe Anglo-American banker led coalition that is tryiing to shift the blame for their own mismanagement somewhere else.

If only you were right. But the misconceptions about how an economy functions are so universal that a democratic takeover would not improve matters. There is also the question of the values and priorities that dominate within a society. Where selfishness is a sufficiently widespread, democracy would solve nothing.

A democratic takeover must be accompanied by a general understanding within a nation of how economies function, and an appreciation of the importance of the welfare of the wider society.

Sen’s emphasis on democracy is 100% on the button. But with the appointment of the US’ candidate for the WB Presidency, the issue is much wider than individual country or even European democracy. We need a new Bretton Woods – for those who have knowledge back to 1944! – to give us democratic institutions at a global level and not the US and G8 dominated neoliberal institutions we currently have – dominated by their governments that is and not their peoples. Some global genuinely democratic institution with power is needed not least on global warming to replace the UN.

PS I was taught the History of Economic Thought – but that was in the 60s!

Professor Sen says: “An economic policy has to be ultimately something that people understand, appreciate and support.”

Surely “ought to be” rather than “has to be”? And surely this “ought” applies also to the formation of policy from the implications of economic theory, along with the need for political integrity (not using theory to obscure and excuse opportunitism? And surely it applies to the formation of economic theory, where in addition it requires adequately true understanding (not only of economic reality but also of logic, language and mathematics) and intellectual integrity (not superficial assumptions, unconscious bias and willingness to deliberately mislead)?

But of course academia today has swallowed “hook, line and sinker” Hume’s 1740 argument that “you can’t derive an ought from an is”, so there is no “ought”, no political opportunism, and no truth: only one golden rule, that “there is no golden rule”, and a policy: to accept what the ruler says as if it were true.

My point is, that if we are not merely to waste out time bleating about the state of the world, we need to be prepared to dig a lot deeper into our own understandings of political economics. Hume based his argument on philosophical interpretation of what was obvious in 1740, i.e. long before the discovery of electric circuits, electromagnetic radiation, evolutionary development, chemical and subatomic structure, physical and physiological mechanisms of serial (indexing) and parallel (error-correcting) logic and memory, and the development of radio and internet communication systems with purpose which “ought” (like those of economics) to be protected by the elimination of error and malicious “visuses”.

Amartys is right, but I would add pluralism to democracy: a society is in general blind to the macroeconomic effects of individual decisions, and democracy is generally only the composition of individual preference, and governments, toghether with pluralist institutions, may be able to take account of macro effects. However, if the law of the markets dominates policies, then policies will be the reflex of individual preferences. This is happening dramatically in Europe, where governments behave exactly like individuals: they do not think that loans create deposits, exopenditure creates savings, debt creates profits, and all this because society has acquired the culture of the individual.

It is such a wearisome process, dealing with economists because they are such poor historians. The world changes and the changes are important. Two important changes occurred in the last half century. One was the Americanization of the subject of economics through the institutionalization of neo-classical-econometric school in advanced economies throughout the world. We studied that through the Marshall plan and the transormation of educational system within and then outside the USA in the post WWII decades. US giverbnebts relentlessly pushed it. That placed the economics taught in the US in a strategic position to institutisonalize itself all over the world. The second thing was the Information revolution, whiich permitted the massive transformation of investtor capitalist markets (institutionalized especialy after the fall of Communism in new stockmarkets and financial derivaties sold all over the world). The transformation of the European banking system along US-UK model in the 1990s is an excellent example of how this technological change made the speculative capitalism of Anglo-Saxonia prevalent in Europe and the world. This is history not economics. And it must be dealt with historically through politics, not tthrough economics.
.

The reason that economists are now such poor historians should not go without comment. Economic history was once a traditional, respected and important field of economics.
Over time “economic historians” were politically maligned, persecuted and their field of study moved to “the arts” or “humanities”.
Economic historians were destroyed and the study of economic history along with it so there was no chance we could learn from the massive mistakes made, if there was no one left to study whether particular economic designs (art) resulted in any real advance.

No, what was more important that the potential economists who come into the field – invent pretty models for banks and financial institutions that explained to the rest of us, that what made that sector fat, made everyone else better off. Any old “new model” would do (as long as the rich profited from it) and anyone with the tools and skills to evaluate whether it actually worked in restrospect had to be suppressed.

Economic history is dead.
Economic fallacies and their servants are alive and well.

Robert, I very much agree with this analysis and its conclusion, subject to what you mean by ‘politics’.

I see an adequate politics involving control of executive representative politics by genuinely democratic constitutional politics: itself subject to the laws of ecology, reason (as against logic narrowly conceived), the understanding that the purpose of a dynamic system is ultimately prior to the subsidiary and instrumental purpose of its parts (i.e. the well-being of mankind to that of businesses and individuals), and a responsible “family” ethos of encouragement and conscious generosity (even self-sacrifice), as against the present ethos of seeking business and personal profits from scarcity and enslavement.

What I don’t find acceptable is Britain’s having an “unwritten” constitution which biassed, partisan, “first-past-the-post” winners of dummed-down “love me or leave me” elections can modify on the hoof as as their financiers “persuade” them to. Not that the American constitution has been much help when their “bought” representatives are able to appoint a judiciary which will ignore it.

What about ‘no representation without taxation?’ Corporations in the US and the UK that offshore themselves so that not only are their tax profiles minimized, but after the various exemptions they claim for are paid back they make a net profit from the tax structure (and I’m not just talking about News International here..) have massive and overwhelming political influence in both countries. The tax system for corporations should be different from that of the individual, it should be transactionally locational (i.e., a percentage of each ATM transaction that takes place in the continental US for banks) so that domicile rules are not an issue and the onus should be on the corporation to show why each aspect of its operations within a given nation-state *should not* pay tax, rather than allowing them to have serried ranks of lawyers and accountants go through the tax laws with a fine tooth-comb looking for exemptions…

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